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Results are not strictly comparable with the corresponding quarter of last year owing to the sale of the sponge iron business in FY09.

(Rs m)

3QFY09

3QFY10

Change

9mFY09

9mFY10

Change

Net sales

26,588

30,519

14.8%

79,282

90,864

14.6%

Expenditure

21,604

20,659

-4.4%

61,128

61,973

1.4%

Operating profit (EBITDA)

4,983

9,860

97.9%

18,154

28,891

59.1%

EBITDA margin

18.7%

32.3%

22.9%

31.8%

Other income

813

888

9.2%

2,766

2,922

5.7%

Interest

439

504

14.8%

1,025

1,484

44.8%

Depreciation

1,198

1,424

18.9%

3,316

4,152

25.2%

Profit before tax/(loss)

4,159

8,820

112.1%

16,579

26,176

57.9%

Extraordinary Item

-

-

-

3,361

Tax

864

2,861

231.3%

3,946

8,170

107.0%

Net profit

3,296

5,959

80.8%

12,633

21,367

69.1%

Net margin

12.4%

19.5%

15.9%

23.5%

No of shares (m)

91.7

91.7

Diluted EPS (Rs)*

275.0

P/E (times)

9.5

*trailing twelve month earnings

What has driven performance in 3QFY10?

Grasim reported 15% growth in revenues largely led by the impressive growth in the VSF business and double digit growth in the cement business. VSF contributed 30% to the company’s topline. In the beginning of 3QFY10, the company announced its plans to concentrate on the VSF and cement business separately. In this regard, Grasim de-merged cement assets and consolidated it to create a pure play cement company under the Aditya Birla group. So going forward, Grasim’s standalone performance would be driven by the VSF business only.

The VSF segment reported an impressive growth of 71% in revenues during 3QFY10. This was supported by robust growth in volumes (51% YoY) and improved realizations (13% YoY). The company’s capacity utilization stood at 98%. On the back of global economic recovery, consumer spending on textiles increased that resulted in an increase in demand for the entire value chain i.e. fibre, yarn and fabric. Additionally, lower availability of cotton benefited the industry. The strong demand was witnessed both globally as well as domestically. The strong growth numbers was also a result of lower base. Operations in the corresponding quarter last year were impacted by the global crisis. Higher realizations, lower input costs and economies of scale led to higher profitability in 3QFY10. The segmental PBIT margins expanded by 32.4% during 3QFY10. VSF remains Grasim’s mainstay business and the company has planned to scale up the assets of this business by 80,000 tonnes at an investment outlay of Rs 10 bn over the next three years. Over the medium term, the demand is likely to sustain at current levels, however margins may come under pressure on account of an upward trend in pulp and sulphur prices.

The cement segment revenues grew by 17% YoY during the quarter led by growth in volumes as realizations remained stable. The company reported 15% YoY growth in production, while sales volumes increased by 17% YoY. The company was able to cater to the increase in demand for the commodity on account of new capacities becoming operational (22.55 MTPA in 3QFY10 as against 18.05 MTPA). The segmental PBIT margins expanded by 5.5% during 3QFY10. Apart from higher volumes, the enhanced share of captive power and lower energy costs supported the margin expansion.

The chemical segment revenues declined by 5% YoY during 3QFY10. This was on account of steep fall in realizations. Otherwise the segment reported 12% YoY growth in volumes, which was largely led by captive use. The realizations were down by 20% YoY due to depressed caustic prices. Prices are expected to remain under pressure due to commissioning of new capacities and cheap imports.

Lower cost of operation enabled the company to report nearly 98% YoY growth in operating profits. Decline in input costs resulted in margin expansion of 13.6% during 3QFY10. Depreciation and interest costs were on the higher side on account of expansion plans. Despite this and increase in tax charges, the company reported 81% YoY growth in bottomline.

The margins are likely to come under pressure as industry wide planned capacities become operational resulting excess supply. However, the long term outlook is promising on account of government initiatives (to boost rural, housing and infrastructural development) and owing to signs of economic revival with the industry expected to sustain 9% to 10% growth in demand. The company would require an additional 25 MT of capacity in order to retain its market share over the next five years. This would be over the planned capital expenditure over the next two years.

What to expect?

Considering the 9mFY10 performance, the company is likely to end the year in line with our estimates. The stock currently trades at Rs 2,608, implying a price to earnings (P/E) multiple of 36.2 times our FY12 estimated standalone earnings. Considering the asset valuation method, which we apply to value the diversified major on a sum of the parts basis, we believe that the stock leaves limited upside potential at the current juncture from a two years perspective.

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